EM Market Report

Fragmentation is the word

Thanim Islam
Thanim Islam 10 June 2022

GBP: Sterling takes advantage of euro moves

EURECB almost hawkish but fragmentation takes the lead

USD: Inflation in focus today ahead of Fed next week


Sterling markets were very quiet yesterday with the ECB taking the lead on events.

No announcement from Boris yesterday on the housing reforms so we await this as the PM continues his roadshow on attempts to re-engage support.

Markets remain braced for the Bank of England interest rate decision next week.


A very interesting ECB meeting yesterday which caused a fair amount of volatility in the euro. So as expected, the ECB kept the June interest rate at -0.5%, raised inflation forecasts, downgraded growth forecasts and announced they will reduce their quantitative easing program. The Bank then went on to say that the July rate hike will be 0.25% with another hike in September and then gradual rate hikes going into year-end.

Whilst the markers seemed disappointed by only raising rates by 0.25% in July the vagueness of another hike in September seemed to give the markets the idea that the Bank could raise rates by 0.5% at this meeting should economic conditions fit. As a result, we saw the euro gain by 0.5% on the notion that the Bank were almost ready to be hawkish on rate hikes. Market bets on the 2022 terminal rate rose indicating at least one 0.5% hike, one 0.25%/0.5% hike followed by a 0.25% hike.

But there was a lack of detail given on how the Bank would deal with the idea of fragmentation. Fragmentation is the fear that when the ECB tightens or loosens monetary policy, the effects aren’t felt the same way across all 19 nations that make up the eurozone. Should fragmentation occur then it could have a devastating effect on the financial stability of the bloc and thus a devastating effect on the euro.

As a result of these moves, the euro swung 1.5% in the opposite direction with the currency finishing approximately 1% lower versus the dollar and the pound.

So whilst the ECB are almost ready to be hawkish in their rate hike cycle, it would appear that until the notion of fragmentation is dealt with, gains on the euro, (which you would see from a typical hawkish Bank message) will be limited and for the time being, could mean further weakness on the euro.


Dollar gains were seen yesterday, following the moves on the Euro with markets turning their attention to the hawkish Fed.

Inflation figures will take the headlines today ahead of the Fed meeting next Wednesday. Inflation peaked in March at 8.5%, easing off in April to 8.3% and today remain at 8.3% (upgraded from earlier in the week).

So long as inflation doesn't deviate substantially lower than the 8.3%, then it's expected that the market will continue to buy/support the dollar on the basis that the Fed should remain on its rate hike path.

Should inflation drop further then we could well see markets reprice the expected 2022 terminal rate and bring in the notion that the Fed may well pause hiking rates in September.

Market rates 

Today's Interbank Rates at 10:43am against sterling movement vs yesterday.


€1.175 ↑

US dollar

$1.247 ↓

Australian dollar


South African rand 

R19.33 ↑

Japanese yen 

¥166.9 ↓

Have a great day.